Routine tissue processing is usually associated with histological artifacts as a consequence of shrinkage and distortion during dehydration required for embedding. With hydrated specimens such as lung, embryonic, and tissues in hydrophilic membranes, tissue processing can induce severe artifacts that interfere with adequate microscopic evaluation. Here we present a method for embedding hydrophilic alginate-polylysine microencapsulated pancreatic tissue that combines the absence of histological artifacts with a practical tissue processing method. We found that the glycol-methacrylate (GMA)-embedding method preserved the integrity of the encapsulated tissue better than snap-freezing or paraffin embedding, but the overall quality of the hydrophilic capsules remained poor Next, we modified the GMA method by introducing gradual dehydration to investigate whether the integrity of the sectioned capsules was better maintained by a more gradual pattern of water extraction. This modification resulted in well-preserved morphological details of the hydrophilic membranes, hydrogel-cell interface, and encapsulated pancreatic tissue. Subsequent routine staining gave excellent contrast between the islet tissue and hydrophilic components, which allowed adequate quantitative histological and pathological comparisons.